Equilibrium underemployment

Paul Jackson

Labour Economics, 2023, vol. 81, issue C

Abstract: This paper develops a model of human capital investment in a frictional labor market with two-sided heterogeneity and liquidity constraints. The model generates underemployment in equilibrium: workers are employed in jobs for which they are over-qualified. Subsidizing education can decrease the returns to human capital investment, increase the underemployment rate, and decrease the unemployment rate. I calibrate the model to the U.S. economy and find the aggregate supply of human capital and underemployment rate are inefficiently low. The constrained-efficient allocation is implemented by increasing unemployment benefits and subsidizing both the creation of high-skill jobs and human capital investment.

Keywords: Underemployment; Human capital; Education subsidies (search for similar items in EconPapers)
JEL-codes: E24 I22 J24 J64 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:labeco:v:81:y:2023:i:c:s092753712300009x

DOI: 10.1016/j.labeco.2023.102334

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